Can Costco Reach a Trillion-Dollar Market Cap by 2030?

As of now, there are only nine companies that have climbed into the prestigious trillion-dollar club, most of which are in the technology sector. However, one major retail player stands out as a potential future member: Costco (COST 0.10%). Over the last five years, Costco’s stock has experienced remarkable growth, surging 236%, considerably outpacing the performance of the S&P 500. This raises an intriguing question: Could Costco achieve a market cap of one trillion dollars by the year 2030? Let's explore some key factors of Costco that investors need to consider.

Key Success Factors

Costco is not just any retailer; it is the third-largest retailer in the world. This achievement stems from several critical characteristics that contribute to its success.

Firstly, Costco enjoys significant scale advantages. Its enormous revenue gives it exceptional negotiating power with suppliers. This leads to favorable pricing for products, which allows Costco to keep prices low for consumers, thereby enhancing its competitive edge.

Secondly, customer loyalty is a cornerstone of Costco’s business model. Offering high-quality products at lower prices is a winning combination that attracts a dedicated customer base. Additionally, Costco operates on a membership basis, which generates a consistent and high-margin revenue stream, while simultaneously driving repeat purchases from its shoppers.

Finally, Costco's financial performance has been remarkably stable. Over the past ten years, the company has seen its revenue grow at a compound annual growth rate of 8.5%, while its diluted earnings per share (EPS) have climbed at an impressive annual rate of 13.5%. Notably, Costco has shown resilience regardless of broader economic fluctuations, whether during periods of recession or inflation.

Growth Opportunities

Currently, Costco operates approximately 900 warehouses, with around 70% located in the United States. In fiscal year 2024, the company opened 29 new locations and has plans to add another 26 locations worldwide. This expansion strategy makes sense as newly opened warehouses often attract long lines and high sales on their opening days, leading to increased profits and more memberships.

While it's difficult to predict Costco's ultimate capacity for store expansion, there are still ample opportunities, particularly in the vast Chinese market and within the U.S. But investors should manage their expectations, as future growth rates may slow compared to the past. Achieving incremental revenue will require more significant efforts, especially since there are limited regions globally where new warehouses can be opened.

Analysts on Wall Street forecast that Costco's revenue will grow at a rate of around 6.9% annually over the next three years, a projection that seems reasonable given current trends.

Valuation Challenges

For Costco to enter the exclusive trillion-dollar market cap club by 2030, its market value would need to increase by 126%, which translates to a compound annual growth rate of 14.5%. This growth rate would be a significant deceleration from the last six years, during which Costco's market cap soared by 349%.

While it is entirely plausible that Costco can maintain a healthy growth rate in revenue and EPS, investors must be cautious about the company’s valuation. Currently, Costco shares trade at a price-to-earnings (P/E) ratio of 60, marking the highest valuation it has seen since its initial public offering 39 years ago.

This high valuation raises a red flag. It's likely that the P/E ratio will decrease over the coming years, which could hinder the company's potential for adequate investment returns. Therefore, it’s my belief that Costco is unlikely to reach a one trillion dollar market cap by the end of this decade.

Note: The author does not own any shares in the mentioned stocks and has no financial interest in the outcomes discussed.

Costco, Retail, Growth